Yuan Has Second Winning Week as China Seeks to Tackle Inflation

By Judy Chen and Belinda Cao

June 13 (Bloomberg) -- The yuan completed a second week of gains on speculation policy makers are seeking a stronger currency to slow inflation.
The yuan has appreciated 1.6 percent versus the dollar this quarter, the best performance among the 10 most-traded currencies in Asia outside Japan. A government report showed yesterday that China's money supply grew in May at the fastest pace in four months, adding pressure on the central bank to rein in inflation.
``China still needs a stronger yuan to curb imported inflation,'' said Tang Liang, a foreign-exchange trader at the Beijing branch of Industrial & Commercial Bank of China Ltd., the nation's largest bank. ``The market is not optimistic about slowing inflation for the rest of this year as non-food inflationary pressure is increasing.''
The currency climbed 0.31 percent to 6.9018 a dollar as of 5:30 p.m. in Shanghai, from 6.9230 last week, according to the China Foreign Exchange Trade System. The yuan is allowed to trade by up to 0.5 percent against the dollar on either side of a reference rate fixed by the central bank each day. The rate was set at 6.9018 today.
M2, the broadest measure of money supply, rose 18.1 percent in May from a year earlier to 43.6 trillion yuan ($6.3 trillion), the People's Bank of China said yesterday. The gauge increased 16.9 percent in April. Economists in a Bloomberg survey had predicted a 17 percent expansion.
`Not Smart'
Inflation slowed to 7.7 percent in May, from 8.5 percent in April, still exceeding the government's annual target of 4.8 percent, according to the statistics bureau yesterday.
China, which invests up to a third of its $1.68 trillion in foreign exchange reserves in Treasuries, is ``not smart'' to invest in U.S. debt and should seek higher returns, said Cheng Siwei, former vice chairman of the National People's Congress, the country's top legislature.
``I don't think it's a smart move to invest in U.S. government bonds,'' said Cheng at a conference in Beijing today. ``We need smart capitalists to invest ourselves.'' The comment was his personal opinion, not government policy, Cheng said.
Government bonds were little changed after rebounding yesterday from a loss earlier this week following a central bank order to raise bank's deposit reserves.
Tightening Policy
Local debt securities lost almost 1 percent on June 10 and 11 after a Chinese holiday, according to an Asian local-currency debt index compiled by HSBC Holdings Plc. The central bank ordered lenders on June 7 to set aside 1 percentage point more of their deposits as reserves, to be paid June 15 and 25.
The securities started to rebound yesterday, with the yields declining 1.2 basis point on average, according to a data posted on Chinabond.com, a Web site run by the government's biggest debt clearing house.
``Bonds moved little in trading as people's worries about funding abated,'' said Xie Xin, a bond trader with Industrial Bank Co. Ltd. in Shanghai. ``Funding costs between banks slid again today.''
The seven-day repo fixing rate, a measure for lending costs in the money market, declined for a third day to 3.34 percent, matching that before the central bank's notice, according to the National Interbank Funding Center.
The Agricultural Development Bank of China sold 10 billion yuan ($1.45 billion) in five-year floating-rate notes today at a spread of 65 basis points more than the benchmark one-year deposit rate of 4.14 percent. The auction drew bids 2.3 times the planned size. A basis point is 0.01 percentage point.
``Investors seemed to have more demand for floating-rate debt when there isn't favorable news for the market,'' said He Xiuhong, a fixed-income analyst at GF Securities Co. in Guangzhou, the nation's third-largest brokerage by revenue.
The yield on the 4.41 percent treasury bond due December 2017 held at 4.25 percent, according to the China Interbank Bond Market. The price of the security was 101.22 per 100 yuan face amount.

To contact the reporters on this story: Judy Chen in Shanghai at xchen45@bloomberg.net; Belinda Cao in Beijing at lcao4@bloomberg.net.